SDFI - Notes 11-22

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As of 1 January 2009, the SDFI’s participation in Statoil Natural Gas LLC (SNG) in the US has been treated as an investment in an associate, which is recognised in accordance with the equity method. At the time it was established in 2003, the investment was recorded at the original acquisition cost
 of NOK 798 million. 

The company’s business office is located in Stamford in the US and is formally owned 56.5 per cent by Statoil Norsk LNG AS, which reflects the SDFI’s ownership interest under the marketing and sale instruction. The remaining 43.5 per cent is owned by Statoil North America Inc. As a result of the merger between Statoil and Hydro’s petroleum activities in 2007, the profit/loss is allocated in accordance with a skewed distribution model which gives 48.4 per cent to the SDFI. 

Statoil consolidates its holding in SNG with other US operations, and uses SNG as a marketing company for gas sales in the American market. The SDFI participates in SNG under the marketing and sale instruction with regard to activities related to the marketing and sale of the government’s LNG from Snøhvit. Cash flows from SNG are settled continuously on a monthly basis in connection with the purchase and sale of LNG. 

In addition to SNG, the shareholdings in Norsea Gas AS and Norpipe Oil AS are included in the table below.
 

All figures in NOK million	2016	2015
Opening balance financial fixed assets (adjusted share)	280	101
Additions	82	180
Closing balance financial fixed assets	362	280

 

The liability comprises future abandonment and decommissioning of oil and gas installations.   Norwegian authority requirements and the Oslo-Paris (OSPAR) Convention for the Protection of the Marine Environment of the North-East Atlantic provide the basis for determining the extent of the decommissioning liability. 

The liability is calculated on the basis of estimates from the respective operators. A number of factors underlying the decommissioning estimate are associated with significant uncertainty, including assumptions for decommissioning and estimating methods, technology and the decommissioning date. The latter is expected largely to occur one or two years after cessation of production. See Note 23.  

Interest expense on the liability is classified as a financial expense in the income statement.  The discount rate is based on the interest rate for Norwegian government bonds with the same maturity as the decommissioning liability. An extrapolated interest rate derived from foreign rates is applied for liabilities which extend beyond the longest maturity for such bonds. 

The estimate for decommissioning costs has been reduced by NOK 2.7 billion as a result of changes into future estimated costs from operators and alterations to cessation and decommissioning dates. This change includes reduced estimates for plugging and abandoning wells and for shutting down installations. 
 

All figures in NOK million	2016	2015
Liability at 1 Jan.	70 129	77 520
New liabilities/disposals	0	0
Actual decommissioning	(584)	(1 355)
Changes to estimates	(2 717)	(9 312)
Changes to discount rates	(666)	1 591
Changes to participating interests	(2)	52
Interest expense	1 386	1 632
Liability at 31 Dec	67 546	70 129

NOK 584 million for cessation and decommissioning accrued in 2016, and is included in the accounts on a cash basis.   
 

Other long-term liabilities pursuant to the NGAAP comprise:
•   debt related to financial leasing of three LNG carriers delivered in 2006 
•   debt related to the final settlement of commercial arrangements concerning the move to company-based gas sales
•   income not yet earned in anticipated repayment of profit shares in licenses with net profit agreements

Three financial leasing contracts were entered into in 2006 on the delivery of three ships to transport LNG from Snøhvit. These contracts run for 20 years, with two options for five-year extensions. The future discounted minimum payment for financial leasing totals NOK 1 357 million. Of this, NOK 199 million falls due for payment in 2017, NOK 799 million in the subsequent four years and the residual NOK 377 million after 2022.  

Repayment of previously paid-up profit shares in licences with net profit agreements is included in long-term liabilities and amounts to NOK 4 972 million. 
Other long-term liabilities total NOK 921 million, of which NOK 303 million falls due within five years from the balance sheet date. 

Not relevant to the accounts on a cash basis. 

 

Other current liabilities pursuant to the NGAAP falling due in 2017 consist mainly of:

• provisions for accrued unpaid costs at December, adjusted for cash calls in December 
• other provisions for accrued unpaid costs not included in the accounts received from operators

Not relevant to the accounts on a cash basis. 

 

Only limited use is made of financial instruments (derivatives) to manage risk in the SDFI portfolio. This is primarily because the SDFI is owned by the state and is accordingly included in the government’s overall risk management. The SDFI does not have significant interest-bearing debt, and sells primarily oil, gas and NGL at current prices. Instruments used to manage price risk for sales at fixed prices or for deferred gas production relate to forwards and futures. At 31 December 2016, the market value of the financial instruments was NOK 277 million in assets and NOK 4 899 million in liabilities. The comparable figures at the end of 2015 were NOK 3 759 million and NOK 331 million respectively. These figures include the market value of listed futures and unlisted instruments. The market value of built-in derivatives related to end-user customers in continental Europe. This amounted to NOK 199 million in assets and NOK 83 million in liabilities in 2016. The corresponding figures for 2015 were NOK 918 million in assets. Net unrealized loss on outstanding positions as of 31 December 2016 are carried to expense.

Price risk
The SDFI is exposed to fluctuations in oil and gas prices in the global market. Statoil purchases all oil, NGL and condensate from the SDFI at market-based prices. SDFI revenue from gas sales to end users is the price actually obtained. Based on the arrangement relating to the marketing and sale instruction along with the SDFI’s participation in the government’s overall risk management, only limited use is made of financial instruments (derivatives). They are primarily employed to manage price risk for sales at fixed prices or for deferred gas production to counteract fluctuations in profit and loss owing to variations in commodity prices.  

Currency risk
The majority of the SDFI’s revenue from the sale of oil and gas is invoiced in USD, EUR or GBP. Part of its operating expenses and investments are also billed in equivalent currencies. When converting to NOK, currency fluctuations will affect the SDFI’s income statement and balance sheet. The SDFI does not utilise currency hedging in relation to future sales of the SDFI’s petroleum, and its exposure in the balance sheet at 31 December 2016 was largely related to one month’s outstanding revenue.  

Interest risk
The SDFI is primarily exposed to credit risk through financial leases. Together with Statoil, it has a financial liability related to charters for LNG ships pursuant to the marketing and sale instruction. The SDFI has no other interest-bearing debt exposed to interest rate fluctuations. 

Credit risk
The SDFI’s sales are made to a limited number of parties, with all oil and NGL sold to Statoil. In accordance with the marketing and sale instruction, financial instruments for the SDFI’s operations are purchased from other parties with sound credit ratings. Financial instruments are only established with large banks or credit institutions at levels of exposure approved in advance. The SDFI’s credit risk in current transactions is accordingly regarded as limited.

Liquidity risk
The SDFI generates a significant positive cash flow from its operations. Internal guidelines on managing the flow of liquidity have been established. 

 

All figures in NOK million	Leases	Transport capacity  and other liabilities
2017	6 168	2 155
2018	4 819	1 822
2019	4 207	1 662
2020	3 505	1 544
2021	2 798	1 281
Beyond	3 381	5 813

Leases represent operations-related contractual liabilities for the chartering/leasing of rigs, supply ships, production ships, helicopters, standby vessels, bases and so forth as specified by the individual operator. The figures represent cancellation costs.   

Transport capacity and other liabilities relate to the sale of gas, and consist mainly of transport and storage liabilities in the UK and continental Europe as well as terminal capacity liabilities relating to the Cove Point terminal in the US. The SDFI’s share of installations and pipelines on the NCS is generally higher than or equal to the transport share. Hence, no liabilities are calculated for these systems.  

Other liabilities
In connection with the award of licences to explore for and produce petroleum, licensees may be required to undertake to drill a certain number of wells. Licensees are also committed to undertake exploration activities through approved budgets and work programmes. Petoro was committed at year-end to participate in 12 wells with an expected cost to the SDFI in 2017 of NOK 530 million. 

The SDFI has also accepted contractual liabilities relating to investments in new and existing fields. Overall, this amounts to NOK 11.5 billion for 2017 and NOK 14.2 billion for subsequent periods, totalling NOK 25.7 billion. Through approved budgets and work programmes, the SDFI was also committed to operating and investment expenses for 2017. The mentioned liabilities for 2017 are included in this total.  

In connection with the sale of the SDFI’s oil and gas, Statoil has issued guarantees to suppliers and owners of transport infrastructure, as well as in connection with operations in the US, the UK and continental Europe. Guarantees issued in connection with trading operations are provided as security for lack of financial settlement. In total, the guarantees amount to NOK 200 million for the SDFI’s share.

The SDFI and Statoil deliver gas to customers under common gas sale agreements. SDFI gas reserves will be utilised in accordance with the SDFI’s share of production from the fields selected to deliver the gas at any given time.  

Not relevant to the accounts on a cash basis. 

 

The SDFI could be affected by possible legal actions and disputes as a participant in production licences, pipelines and onshore facilities, and in the joint sale of the SDFI’s gas together with Statoil. The final scope of the SDFI’s liabilities or assets associated with such disputes and claims cannot be reliably estimated at this time. The SDFI’s financial standing is not expected to be significantly impacted by the outcome of such disputes. Provisions have been made in the accounts for issues where a negative outcome for the SDFI portfolio is thought to be more likely than not.  
  
Not relevant to the accounts on a cash basis. 

 

The SDFI accounts are presented in accordance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles (NGAAP), which means that the management makes assessments and exercises judgement in a number of areas.  Changes in the underlying assumptions could have a substantial effect on the accounts. Where the SDFI portfolio is concerned, it is presumed that assessments of the book value of tangible fixed assets, reserves, decommissioning of installations, exploration expenses and financial instruments could have the greatest significance.  

Recoverable reserves include volumes of crude oil, NGL (including condensate) and dry gas as reported in resource classes 1-3 in the classification system used by the Norwegian Petroleum Directorate (NPD). Only reserves for which the licensees’ PDO has been sanctioned in the management committee and submitted to the authorities are included in the portfolio’s expected reserves. A share of the field’s remaining reserves in production (resource class 1) provides the basis for depreciation. A share of oil and gas, respectively, is calculated annually for the portfolio to represent the relationship between low and basis reserves. This common share is used to calculate the depreciation basis for each field. The downwardly adjusted basis reserves which make up the foundation for depreciation expenses are of great significance for the result, and adjustments to the reserve base can cause major changes to the SDFI’s profit. 

Drilling expenses are capitalised temporarily until an assessment has been made of whether oil or gas reserves have been found. Assessments of the extent to which these expenses should remain capitalised or be written down in the period will affect results for the period. 

Substantial investments in tangible fixed assets have been made in the SDFI portfolio. Each time the accounts are made up, these are reviewed for indications of a decline in value. The assessment of whether an asset must be written down is primarily based on judgements and assumptions about future market prices.  

Reference is otherwise made to the description of the company’s accounting principles and to Notes 12 and 15, which describe the company’s treatment of exploration expenses, uncertainties related to decommissioning and financial instruments.  

Not relevant to the accounts on a cash basis.

 

All figures in NOK million	2016	2015
Equity at 1 Jan	161 524	166 165
Net income	57 426	88 999
Cash transfers to the government	(65 897)	(93 639)
Equity at 31 Dec	153 053	161 524

Not relevant to the accounts on a cash basis. 

 

The SDFI is subject to the Appropriations Regulations, as well as the Regulations and Provisions on Financial Management in Central Government. In accordance with the Act relating to the Office of the Auditor General (OAG) of 7 May 2004, the OAG is the external auditor for the SDFI. The Auditor General issues a final audit letter (report) concerning the SDFI accounts and budget, which is expected to be published during the second quarter of 2017. 

In addition, PricewaterhouseCoopers AS (PwC) has been engaged by the board of directors of Petoro AS to perform a financial audit of the SDFI as part of the internal audit function. PwC submits its audit report to the board in accordance with international auditing standards. PwC’s fee is charged to the accounts of Petoro AS.
 
 

 

	2016		2015		2014		2013
Oil* in mill bbl  Gas in bn scm	oil	gas	oil	gas	oil	gas	oil	gas
Expected reserves at 1 Jan	1599	743	1318	767	1395	799	1458	821
Corrections for earlier years**	(3)	(1)	(10)
Change in estimates	18	(1)	17	7	68	1	41	6
Extensions and discoveries	1	0	367	2	4	1	12	3
Improved recovery	20	1	57	4	0	0	35	5
Purchase of reserves	2	6
Sale of reserves
Production	(150)	(37)	(150)	(38)	(148)	(34)	(151)	(36)
Expected reserves at 31 Dec	1489	712	1599	743	1318	767	1395	799

*    Oil includes NGL and condensate.
**  The correction is due to individual fields reporting negative reserves. Production is measured exactly, whereas remaining reserves 
      are estimates.

At the end of 2016, the portfolio’s anticipated remaining reserves of oil, condensate, NGL and gas amounted to 5968 million barrels of oil equivalent (boe). This is down 308 million boe from the end of 2015.  An overall 82 million boe were added to reserves in 2016. The growth is mainly associated with the purchase of the Dvalin field as well as improved recovery in existing fields in the SDFI portfolio in 2016. At the same time, adjustments were made on some fields. 

A total of 381 million boe were produced in 2016, giving a reserve replacement rate of 22 per cent for the year. The corresponding rate in 2015 was 133 per cent.

 

Petoro contributes to research and development (R&D) through the SDFI meeting its share of these costs in the production licences. NOK 546 million was expensed by the SDFI for R&D in 2016 as regards charges from the operators during the year.